Fuel crisis threatens housing supply as construction costs surge for developers

Australia’s already-strained housing market is reaching a boiling point, with escalating conflict in Iran and the knock-on effects of a fuel crisis adding further pressure to the development industry.

The ongoing tension, while geographically distant, have hit close to home for developers already operating on thin margins.

With oil prices surging above USD$100 per barrel, the conflict is rapidly eroding the financial viability of projects, both new and underway, through increased fuel and materials costs.

These rising costs are being passed on to developers, blowing out construction budgets that were often assessed and locked in much earlier.

For developers delivering medium to high-density projects off-the-plan, the result is a widening gap between fixed revenues and escalating projects, placing future housing supply at risk.

Fuel costs ripple through construction

The impact of rising fuel costs is being felt across every layer of the construction process.

An estimated 20 per cent of the global oil supply flows through shipping routes in the Middle East, and with the conflict effectively closing the Strait of Hormuz, prices have reacted quickly to the disruption.

At a local level, this has translated to a sharp increase in fuel costs.

Fuel prices have shot up by more than 30 per cent, reaching unprecedented highs, particularly in regional and remote areas.

As fuel prices climb, suppliers are increasingly forced to reprice their services.

These adjustments then cascade through the broader supply chain, filtering down to developers and often being introduced mid-project.

Further compounding the issue is the energy-intensive nature of construction materials.

Australian Bureau of Statistics (ABS) data indicates that construction input prices rose 2.6 per cent over the past year, while overall construction costs remain close to 50 per cent higher than pre-pandemic levels.

Mid to high-density projects under greatest pressure

While all housing projects are impacted by cost increases, medium to high-density projects are uniquely exposed.

These developments, such as apartment buildings and townhouses, are central to increasing supply and providing relief to Australia’s ongoing housing crisis.

According to the ABS, residential housing options that don’t fit into the traditional detached housing model grew by 23.4 per cent in the December 2025 quarter.

These developments typically rely on pre-sales to secure financing or ensure completion of the project. The aim is to sell residences off-the-plan, typically prior to or during the construction phase, effectively locking in the final sale price at the outset.

In stable market conditions, this model provides certainty for the developer.

In a volatile market like we’re seeing reflected now, these projects are highly vulnerable to cost changes.

If costs rise after contracts are signed, developers have no choice but to absorb them, which may put the feasibility of the project under threat.

This disconnect between fixed revenues and rising costs is now a defining challenge for the development sector, forcing some to respond by delaying commencements, redesigning to reduce costs, or even shelving projects altogether.

Concerns for housing supply necessitate policy intervention

For a housing market already under immense pressure, cutting off a critical pipeline of new supply will only spell trouble.

ABS data indicates that Australia’s population grew by 1.5 million people between 2023 and 2025, while completions during this period came in at 527,222 new homes.

The Australian Government’s National Housing Accord has set a target to build 1.2 million new homes in five years, yet new home deliveries are already well behind this schedule.

Without a consistent flow of new housing stock, this gap between supply and demand will continue to widen.

While the source of the disruption may lie overseas, it’s up to Australia’s government to introduce policy support to ease the pressure on the crucial development sector.

Targeted interventions to help ease the burden of cost increases will be critical to keeping developments moving, and most importantly, sustaining a new supply of housing for Australia’s growing population.

Developers have been under pressure to keep building, and alongside their building partners, are motivated to do everything possible to keep their projects moving forward.

It will be essential that developers and builders work together during this unprecedented period to keep projects on track and ensure high-quality stock is delivered.